Land­lords and ten­ants will both gain in sta­bilised pre­dictable long-term leases

The in­flux of for­eign work­ers, brought on mostly by the gam­ing and fi­nan­cial ser­vices sec­tors, has had an over­whelm­ingly pos­i­tive ef­fect on the Mal­tese econ­omy as the coun­try con­tin­ues to see sub­stan­tial growth. How­ever, all growth has its pains, with the

The white pa­per outlines the fact that mar­ket man­age­ment is not nec­es­sar­ily detri­men­tal to the free mar­ket, with the two main mod­els sug­gested be­ing a min­i­mum con­trac­tual term with pe­ri­od­i­cal rent in­creases, and longer-term leases through fis­cal in­cen­tives. Can you elab­o­rate?

The main thrust be­hind the pro­posal is to pro­mote longer-term leases as they pro­vide sta­bil­ity to both the ten­ant and the land­lord. Cur­rently, cer­tain es­tate agents are pro­mot­ing shorter term leases for land­lords as this al­lows them to re­vise the ren­tal con­di­tions on a reg­u­lar ba­sis. This made sense in the con­text where rents were ris­ing by an av­er­age of 30 per cent a year. How­ever, ac­cord­ing to in­for­ma­tion we ob­tained from lead­ing es­tate agents and sta­tis­tics from the NSO, it ap­pears that prices are sta­bil­is­ing.

We have reached a point where the mar­ket has in­flated, de­mand has risen in line with other EU coun­tries and it ap­pears that, due to the ris­ing un­af­ford­abil­ity of home own­er­ship, the ren­tal sec­tor is ex­pected to grow, yet prices have plateaued. The time is right for the state to in­ter­vene and reg­u­late the sec­tor. The land­lord al­ready stands to gain in a sta­bilised mar­ket. Short-term rentals bring about a num­ber of is­sues: you get one month’s rent knocked off just in agency fees, you in­cur main­te­nance costs and there are gap pe­ri­ods where you stand to lose rev­enue.

And is there a min­i­mum length of con­tract you would sug­gest?

This de­pends. When we started this ex­er­cise we found that there was so much mis­in­for­ma­tion about the sec­tor that the first ob­jec­tive of the White Pa­per should be to set out the pa­ram­e­ters of the dis­cus­sion. With re­gard to min­i­mum stat­u­ary du­ra­tion, it could ei­ther be stip­u­lated that a prop­erty can­not be leased out for than three years, or it could also be that the min­i­mum du­ra­tion is set to one year and that longer stays would pro­vide the land­lord with fis­cal tax in­cen­tives, which both pro­duce a higher de­gree of sta­bil­ity.

In the white pa­per, we are al­low­ing space for in­creases, which we sug­gested can be pegged to PPI and capped at a cer­tain per­cent­age.

So far in our dis­cus­sion with all stake­hold­ers, we have re­ceived feed­back that a min­i­mum du­ra­tion should not be longer than a year, as there are con­cerns that peo­ple would au­to­mat­i­cally switch to short-term rentals. I do not think this would be the case, but this is the feed­back we have re­ceived so far. Mean­while, oth­ers have said that a three-year min­i­mum is es­sen­tial for house­holds that have de­pen­dent chil­dren, given that they can­not be ex­pected to make an­nual hous­ing ar­range­ments.

The pos­si­bil­ity of a hy­brid model has not been ex­cluded.

The rise in ren­tal prices has mostly been caused by the in­flux of high-earn­ing for­eign work­ers, who gen­er­ally do not want to make such long-term com­mit­ments in a for­eign coun­try. Given that the mar­ket is mostly geared to­wards them, would the re­moval of six-month leases be dan­ger­ous?

One of the as­pects of the model is that it im­poses a min­i­mum con­trac­tual du­ra­tion of three months for the ten­ant, whereby he or she can­not with­draw from the agree­ment. Be­yond that, the ten­ant can with­draw as long as ad­e­quate no­tice is given to the land­lord, which could be be­tween two or three months. It is clear that the hous­ing sce­nario and em­ploy­ment sce­nario go hand in hand, but from our stud­ies it ap­pears that the av­er­age stay for for­eign work­ers in Malta is be­tween two to four years, mean­ing that this mar­ket has al­ready moved in that di­rec­tion.

The White Pa­per also calls for the op­ti­mi­sa­tion of rent sub­sidy schemes. As we have seen in the past, how­ever, this has of­ten re­sulted in price in­creases. Means test­ing and es­tab­lished bench­marks have been men­tioned, with a mea­sure in the bud­get with re­gard to sub­si­dies rang­ing be­tween € 3,000 and € 5,000 be­ing lifted from this White Pa­per. Could you pro­vide more de­tails?

One of the is­sues we found dur­ing our re­search was af­ford­abil­ity. How do you deal with af­ford­abil­ity? Some were sug­gest­ing in­tro­duc­ing an in­dex to which ini­tial prices will be pegged. For ex­am­ple, it would say that a two-bed­room apart­ment in a par­tic­u­lar area can­not cost more than a cer­tain price.

There are sev­eral rea­sons for re­ject­ing this im­po­si­tion. Firstly, the tough ex­pe­ri­ence Malta has had in the past with rent con­trols meant that it would be im­pos­si­ble for the mea­sure to be well re­ceived. Se­condly, there aren’t even the means to do so, given that there isn’t tech­ni­cally a data­base of rents col­lected in Malta that goes back a suf­fi­cient length of time for the col­lec­tion of re­li­able fig­ures. How can you know what rented prices should be in ar­eas that have only re­cently be­come a ren­tal area?

In­ter­na­tional stud­ies have also in­di­cated that the im­po­si­tion of such con­trols should be a tem­po­rary, ex­tra­or­di­nary mea­sure that should only ap­ply in an emer- gency, as it will only dis­in­cen­tivise fu­ture in­vest­ment.

It would only work if there is a con­tin­u­ously up­dated list, oth­er­wise there will be a re­stric­tion in po­ten­tial rents which will cre­ate fu­ture prob­lems.

The so­lu­tion was sub­si­dis­ing ten­ants. The prob­lem was that in the past when­ever sub­si­dies where in­tro­duced they were in­ef­fec­tive as they were not be­ing in­cor­po­rated within a le­gal frame­work. You had some cases, espe­cially with un­writ­ten con­tracts, where a land­lord would come as soon as he knew that you had ap­plied for a sub­sidy and re­vise the agree­ment.

In the new frame­work, sub­si­dies will be ad­min­is­tered in a much more ef­fec­tive way in a more reg­u­lated en­vi­ron­ment. In the past, the sub­sidy was around €80 a month, which was in­creased to €166 when prices started go­ing up. Was it enough? There was an ev­i­dent short­fall in cases with vul­ner­a­ble peo­ple earn­ing €700 a month but re­quired to pay €800 in rent.

The cri­te­ria should be cal­cu­lated on the in­come of the ten­ant and the ren­tal price, with the gov­ern­ment cov­er­ing the dif­fer­ence. The sub­sidy would also be capped, in as much as you would not be able to use it on a three-bed­room apart­ment if you are a sin­gle per­son.

It should be made clear that none of our pro­pos­als have come from a cre­ative think­ing process. They are not ab­stracts but sys­tems in­spired by for­eign mod­els and adapted to the lo­cal con­text.

Af­ford­abil­ity is an is­sue. How­ever, it ap­pears that the White Pa­per seems to mainly fo­cus on low-in­come earn­ers, so what is be­ing done to ad­dress more mid­dle-class is­sues, espe­cially with young peo­ple?

What we have seen is that prob­lems are be­ing felt by young, sin-

gle peo­ple and those who are com­ing out of a sep­a­ra­tion or divorce. In fact, a study car­ried out by the Par­lia­men­tary Sec­re­tar­iat and the Cen­tral Bank re­vealed that, in 2016, a sin­gle in­di­vid­ual, aged 25 and want­ing to buy a prop­erty in the cheap­est part of Malta would need to be in re­ceipt of a gross an­nual in­come of at least €20,000 a year, which ex­ceeds most ini­tial wages. If it is a cou­ple, it would ap­pear to be fine.

On this, the White Pa­per is sug­gest­ing an in­crease in so­cial hous­ing. There was a de­lay in build­ing prop­er­ties as de­mand grew while the wait­ing list­ing for so­cial hous­ing also grew, mean­ing that the mar­ket had be­come highly sat­u­rated while the pri­vate ren­tal sec­tor be­came more ori­en­tated to the higher in­come de­mo­graphic.

The White Pa­per is also propos­ing the cre­ation of a fourth layer to the prop­erty mar­ket – be­yond the ren­tal, own­er­ship and so­cial hous­ing facets – which is af­ford­able hous­ing. This can be done through a PPP or foun­da­tion wherein both the gov­ern­ment and the pri­vate sec­tor con­trib­ute to make prop­er­ties avail­able at af­ford­able prices. We are ea­ger to hear sug­ges­tions made dur­ing the pub­lic con­sul­ta­tion as to what the pri­vate sec­tor would be will­ing to con­trib­ute to­wards creat­ing this layer. For the other group, this has been ad­dressed in the bud­get through the eq­uity scheme.

On that pro­posal, while it says that a scheme will be in­tro­duced for peo­ple aged 40 and above who find it dif­fi­cult to get a loan from a bank, it does not ex­plain fur­ther. Can you elab­o­rate?

Ba­si­cally, what will hap­pen is that a per­son will be pur­chas­ing a prop­erty by con­tribut­ing to the scheme.

It is ba­si­cally a re­vamped scheme. What will hap­pen is that a per­son will pur­chase a prop­erty by con­tribut­ing half the amount, which will be like an or­di­nary loan. An agree­ment will then be made, ei­ther with a bank (there are cur­rently ne­go­ti­a­tions with APS) or the gov­ern­ment, who would buy the other half of the prop­erty al­low­ing you ac­cess to the prop­erty mar­ket and not re­quire the same amount of cap­i­tal. The gov­ern­ment will al­ways cover the in­ter­est. Once the loan has been paid, the ten­ant can pur­chase the other half of the prop­erty as a right of pref­er­ence, with the price be­ing locked to the ini­tial pur­chase, or it could be bought by the gov­ern­ment. The ten­ant would be able to re­main an oc­cu­pant of the prop­erty but will be re­quired to pay a so­cial rent.

It should be made clear that the fig­ures will be set later and will be geared to­wards pur­chas­ing af­ford­able prop­er­ties. The ini­tia­tive will be launched of­fi­cially in 2019 and will pro­vide a more con­crete and de­tailed pic­ture.

The is­sues in the mar­ket arise from wages not hav­ing de­vel­oped at the same rate as prices, be­yond those work­ing in the gam­ing and fi­nan­cial ser­vices sec­tor. Is the in­tro­duc­tion of all these mea­sures just pa­per­ing over the cracks, given that these peo­ple would es­sen­tially be in poverty with­out them?

One mar­ket adapts to the other. We have re­ferred to the sta­bil­i­sa­tion of prices. Why have these sta­bilised? Even the salaries of those work­ing in the sec­tors you’ve men­tioned have a limit. There is an im­pres­sion in Malta that the more for­eign­ers that come here, the more rents will rise, with land­lords ex­pect­ing that prices will con­tinue ris­ing by 30 per cent in­def­i­nitely. This is not the case. In re­al­ity, hous­ing prices have adapted nat­u­rally to wages at the mo­ment. Be­fore it was a ten­ants’ mar­ket with low de­mand and there was a sup­ply of prop­erty. Now it has be­come ev­i­dent that the grow­ing econ­omy has re­sulted in re­newed in­ter­est in the mar­ket.

Does this mean that there is a de­gree of un­af­ford­abil­ity across the sec­tor? No, there are sev­eral house­holds who are rent­ing and find­ing it af­ford­able. It is com­pa­ra­ble to other EU coun­ties. What is clear is that there is a prob­lem in the lower lev­els, which is why we are try­ing to strengthen their eco­nomic and fi­nan­cial po­si­tion by in­ject­ing money through sub­si­dies.

An­other key fea­ture of the White Pa­per is the reg­is­tra­tion of ren­tal con­tracts. How­ever, will this work in Malta, given that there are many in the ‘busi­ness’ who do not even pay tax?

There are two key penal­ties we are see­ing in terms of reg­is­tra­tion. We know there is an ev­i­dent cul­ture of non-com­pli­ance and of un­der-dec­la­ra­tion. It would have been an in­com­plete re­form had it not fore­seen the pos­si­bil­ity of land­lords who would re­sist. If the state catches a land­lord who is rent­ing a prop­erty with­out a reg­is­tered con­tract, then penal­ties will be im­posed. The amount of the penalty still has to be de­cided, but harsh penal­ties for those who are non-com­pli­ant was a clear di­rec­tion we re­ceived.

The sec­ond is in­spired by Ital­ian leg­is­la­tion and would give the ten­ant the pos­si­bil­ity to seek a rem­edy with the courts to impose a con­tract on both par­ties if the land­lord re­fuses to do so. The depart­ment cre­ated within the Hous­ing Author­ity will as­sist the ten­ant in the col­lec­tion of ev­i­dence. This has to be es­tab­lished as it is cru­cial to en­sure a proper distri­bu­tion of sub­si­dies and in­cen­tives.

There is a sec­tion which also pro­poses cases of with­drawal from the con­tract for land­lords. How­ever, these cases, which are the al­lo­ca­tion of the prop­erty to a rel­a­tive, the sale of the prop­erty, de­mo­li­tion or to carry out cer­tain ren­o­va­tions, seem geared more to­wards the rights of the de­vel­oper and un­fair to ten­ants. Should fi­nan­cial com­pen­sa­tion be im­posed?

These mea­sures were sug­gested dur­ing the in­ter­nal con­sul­ta­tion phase. When we pro­posed the pos­si­bil­ity of medium-term stat­u­ary du­ra­tion, the pre­oc­cu­pa­tion of land­lords was what if they needed the prop­erty ur­gently. We dis­cov­ered that sev­eral ju­ris­dic­tions, in­clud­ing Italy, make pro­vi­sions for this. As is set out in the White Pa­per, this could only ap­ply af­ter a min­i­mum du­ra­tion of a year.

We also learnt that, while the ten­ant is only tech­ni­cally bound for six months, the land­lord was be­ing bound for three to four years. There has to be some sort of sym­me­try be­tween the par­ties and this will only be done through ad­e­quate no­tice for the ten­ant and in jus­ti­fied cases.

Are there any fears that these clauses could po­ten­tially be ex­ploited, par­tic­u­larly in the case of vul­ner­a­ble peo­ple?

This is the sort of thing that will be re­fined, once the par­tic­u­lar model is se­lected, but we will en­sure that the author­ity will make checks and that doc­u­men­ta­tion will also have to be provided to jus­tify the case.